Randomly Noted

Call him the stock market senator. The fix-the-plumbing stock market senator, to be more precise.

Sen. Edward “Ted” Kaufman, the Democrat from Delaware who is filling out the term of Joe Biden after Biden ascended to the vice presidency, has distinguished himself with his knowledge, concern and vigor about the inner workings of U.S. stock trading. He’s now getting some media attention because of it.

There likely are some in the high-frequency trading community and other pockets of Wall Street pleased with the prospect that Kaufman’s term is winding down and that he won’t run for election when his Senate seat comes up in November of this year. He’s keeping the heat on them, as he is on the Securities and Exchange Commission.

Kaufman’s year-long interest in the current state of stock trading reached a high-point with an early August letter to SEC Chairman Mary Schapiro in which Kaufman makes a series of reform recommendations.

Usually, when legislators send letters to regulators, they are looking for answers because something is affecting their constituents or a media report has shed light on a problem in an area where they have an interest because of committee membership or otherwise.

The Aug. 5 Kaufman letter to the SEC bears no resemblance to such documents. Besides showing an acute understanding of the myriad and obscure workings of today’s stock trading - dark pools, high-frequency trading, excessive messaging and the like – Kaufman has eight pages of proposals.

The “flash crash” of May 6, when stocks gyrated wildly and breathtakingly dropped at warp speed in a few minutes of an otherwise uneventual Spring mid-afternoon, has to a degree borne out Kaufman’s pre-dated concerns. He’s questioning the whole thrust of market developments of recent years.

“The proliferation of exchanges and other market centers that has increased fragmentation, the substantial rise in volume executed internally by broker-dealers in dark pools, excessive messaging traffic, the dissemination of proprietary market data catering to high frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets,” he wrote to Schapiro.

Among Kaufman’s specific suggestions: register high-volume, high-frequency traders with the SEC; raise the standards for becoming a market center (there are more than 50); examine whether too much order flow is being hidden from ‘lit’ markets in dark pools; and essentially rethink the whole structure to emphasize truly liquid markets.

The SEC, of course, has quite a bit on its plate. The Dodd-Frank financial reform bill handed over some important new powers. Indeed, just today, the SEC is expected to vote for a controversial plan to make it easier for large shareholders to nominate directors whose candidacy must be carried in company distributed materials.

Kaufman, who earned a master’s of business adminsitration from the Wharton School at the University of Pennsylvania, told the SEC it is at a historic juncture.

Will it be a “regulator by consensus,” which Kaufman described as one that only moves “when it finds solutions favored by large constituencies on Wall Street?” Or, in his view, something more.

You can agree or disagree with Kaufman’s recommendations. It’s hard to disagree with the notion that what we call the stock market has morphed into a complex web of interactions that few truly understand. And it’s good to see a legislator who knows his stuff before he speaks his mind.

The timing is quite interesting.

On the eve of new rules that will enable large institutional shareholders to more easily nominate their own candidates to U.S. public company boards of directors, two such investors are demonstrating why the pending Securities and Exchange Commission rule is not needed.

The two institutions, of course, are not setting out to disprove the need for the rule. They are simply and rightfully demonstrating the power big shareholders already have to try to change directors when they think something is amiss at a company in which they own shares.

“Entrenchment and ossification.” Those are the charges hurled at the board of Occidental Petroleum Corp. by the California State Teachers’ Retirement System (CalSTRS) and San Diego money manager Relational Investors LLC. The two own about 1% of Occidental’s shares.

Frustrated with what the investors say is too-high pay for Oxy Pete Chief Executive Dr. Ray R. Irani and the perceived lack of a succession plan for the 75-year-old CEO, the investors plan to nominate at least four directors to compete with incumbents at the company’s next annual meeting.

Switch to the SEC, where after years of debate a late August vote is expected to finally usher in an era of “proxy access,” where large holders whose shares have achieved some minimum age will be able to nominate directors whose candidacies will be carried in the proxy material companies sent to investors. In other words, some shareholders will get to nominate directors and the company will pay the freight to get the choices to shareholders.

The negatives here are the potential for the election of special interest directors representing the interests of large shareholders, including public pension funds and big unions, rather than all shareholders. It potentially turns more director contests than necessary into election campaigns.

Most of all, the Oxy Pete effort and others before this show that when they feel strongly about issues, large shareholders already have the wherewithal to try to spur change on boards and within top management. Legislating majority votes for non-contested director elections will reinforce these powers.

Back to Oxy Pete. The Wall Street Journal found Irani the third highest-paid executive in the past decade. Against that, the company’s share price is up 687% in the past 10 years, the Journal reported, compared with an oil index that rose 106% in a comparable period.

In their letter, the investors state Irani’s “target awards are now nearly twice those of the CEO at Exxon Mobil, the largest company in the world, and over three times that of Occidental’s peer group average.”

A company spokesman defended the pay practices and told The Wall Street Journal the recent elevation of the company’s chief financial officer to chief operating officer was indicative of the board’s deep involvement in succession planning.

As for CalSTRS and Relational, they say in their letter they are ”convinced that shareholders would overwhelmingly support our candidates to replace members of the current board, including its chairman and lead director.”

That certainly sounds like corporate democracy in action.

Mary Schapiro could have been triumphal in her talk today to the U.S. Chamber of Commerce.

The chairman of the Securities and Exchange Commission walked into the den of perhaps the agency’s leading adversary with a massive new regulatory law in her back pocket that greatly enhances the SEC’s powers.

That law demands the SEC undertake studies and rulemaking to get the job done.

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The fraught and mixed nature of Americans’ feelings towards big pay days seemed on display today as the so-called pay czar, Kenneth Feinberg, criticized 17 U.S. firms for pay practices at the height of the credit crisis.

Despite the critique of the bankers for handing out some individual payouts above $10 million while taking help from the government, Feinberg didn’t even reach for his biggest weapon, such as it is, a censure that the firms broke with the public interest.

All of which leaves one thinking, why undertake this particular exercise? Why the preceding hoopla?

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Pardon my skepticism, but in his prepared remarks to accompany his signing today of the historic Dodd-Frank financial regulatory overhaul, President Barack Obama use some very finite words about the end of taxpayer bailouts.

“The American people will never again be asked to foot the bill for Wall Street’s mistakes,” the President said. “There will be no more taxpayer-funded bailouts. Period. If a large institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy.”

First of all, never is a long time.

Second, the untested regulatory wind down of failing systemically important institutions seems to require foresight and exquisite timing from regulators, something that hasn’t heretofore been on display in abundance.

Third, since there are no caps on size, one would presume that the large, important financial institutions in this country (those previously deemed too big too fail) will simply grow larger as they take advantage of strong market positions and economies of scale. That would make any future wind down all the more complex.

It would be a great thing if taxpayer money never again has to go to keep a systemically important financial institution from failing. But it’s a question whether the just signed reform law fully guarantees that.

The Securities and Exchange Commission should be on the verge of a better funding mechanism to do an ever-expanding job.

The about-to-be-signed Dodd-Frank financial reform bill  changes the SEC’s funding structure, said SEC Chairman Mary Schapiro, tying the agency’s funding to the fees it collects. “So any increase or decrease in the agency’s budget would be matched by a rise or fall in fee collections,” she said.

The SEC chairman, in testimony prepared for a U.S. House of Representatives committee,  offered a way to look at the quite recent bad old days of too-tight budgets. Schapiro said that in the past 20 years, the dollar value of the average daily volume in stocks, exchange-traded options and securities futures has grown by more than 25 times, now standing at about $245 billion a day.

In that same period, the agency designated to watch over those burgeoning markets actually reduced staff “and its technology fell further behind,” said Schapiro.

But there’s no doubt the wind is now at the SEC’s back. This year, budget wise, the agency got back to where it was five years ago.

For fiscal 2011, the administration request is for a 12% budget increase, which would allow the SEC to add another 374 professional staff, bringing SEC employees to a total of 4,200.

 Given the extra responsibilities coming with the Dodd-Frank bill, Schapiro repeated her view that the SEC will need 800 new positions over time to cope.

Ben Bernanke is now positioned to outshine his long-serving predecessor among those making the greatest impact as leaders of the U.S. Federal Reserve.

It’s not just that the 18-year reign of Alan Greenspan, the once universally admired Maestro, is now perceived as severely tarnished from the vantage point of our post-2008 woes.

Greenspan, who once could do no wrong with the denizens of Capitol Hill and the inhabitants of bank trading rooms, now stands accused of being so allergic to economic downturn as to prime the system for asset price bubbles.

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Sliding global market sentiment – resulting in dramatic stock and bond price movements today – demonstrates investors’ shock of recognition that there’s no one left to help.

Like a young adult leaving home after the comfort of parental aid, most of the major Western economies have gotten the help they are going to get from fiscal and monetary policies. The long slog towards truer economic recovery doesn’t create great prospects right now for stock prices.

For the umpteenth time the Dow Jones Industrial Average slid under 10,000 today, a solemn reminder to would-be stock bulls that the broad market’s been at best in a holding pattern since the DJIA first shot through 10,000 in 1999.

The 10-year Treasury note, in a sign of pretty severe risk aversion and little hope for palpable economic growth, is posting a yield just below 3%. In April, a time of more vigorous economic outlook, the yield was a full percentage point higher.

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News that Congressional conferees last week agreed to essentially change the nature of U.S. public company boards of directors hasn’t gotten much attention.

It’s hasn’t the star power of  handling too-big-to-fail financial institutions or demanding more transparency in mortgages offered to home buyers, but these governance matters are important to the basic power grid within companies.

In essence, what the conferees agreed and what’s almost certain to soon be signed into law by President Barack Obama makes it harder for incumbents to stay on a company’s board of directors. Another provision raises the possibility directors will find themselves in comfortable chairs in a dark paneled board room next to someone nominated by shareholders who might have causes to push beyond maximizing investor returns.

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He might be in Canada for back-to-back summits with other world leaders, but U.S. President Barack Obama still has one eye on domestic politics and some still unfinished business: the overhaul of financial regulation.

Conferees from the House and Senate settled on a final, sweeping bill, but Obama, in his weekly radio address, pushed the legislators to take the reform bill “over the finish line.”

Two interesting points from Obama’s talk. Number one: while others are still debating the causes of the subprime housing-inspired severe credit crisis, the President lays it squarely on the lack of effective regulation.

“We’re still digging ourselves out of an economic crisis that happened largely because there wasn’t strong enough oversight of Wall Street,” he said.

Obama also said the bill agreed by the conferees encapsulated 90% of what he wanted from reform.